Thanks for your lecture sir I am bit confused as I thought the lost contribution will be 4-3=1. So the transfer prices will be 70+ 1*10(hr)= 80 . Since I think that by producing y , they would be earning at least 3$ per hour instead of $4. So lost contribution is $1 per hour.

I attempted example 8 before watching the lecture as advised. I arrived at $110. However, my rationale was different as follows:

Division A will only be motivated to transfer product Y to division B, if B pays at least $100 (the external price, so there is no loss of contribution to A, in view of the limited capacity and unlimited external demand). In addition, every time A produces and sells product Y at $100, there is a loss of $10 contribution ( the10 hours required to produce one Y will produce 2 Xs, will gives $40 contribution instead of $30)

Hence Minimum transfer price > marginal cost + loss contribution due to external price + loss contribution for producing Y instead of X i.e. 70+ 30+ 10.

Hi, Ms. Jhone that was very informative I didn’t need to read it even thank you. I just wanted to ask you a very tiny thing?

if $70 was the marginal cost for Y then what is the $30 given in the example represents. am saying this because you deduct the 70 from 110 and the result was the contribution cost.

But they wouldn’t be selling Y externally. If they were not selling to the other division they would make X and sell that externally because it would give a higher contribution.

Sir Minimum transfer price that should be charged should be 140 ? I mean Y is selling the product externally for 100… 70 the mariginal cost and 30 the contribution So if division A is selling Y to division B They should get 70 the marginal cost + 30 lost contribution by selling externally + (10*4=40) contribution lost by not selling X … so the total should have been 70+30+40 = 140 isn’t it? I’m little confused here Please do help sir

yes, because profit has to be made on producing Y, the contribution(less and cost saving) should be added to the marginal cost with the lost contribution of 40, in total Minimum tranfer price A should charge for producing Y should be 100(variable cost plus) and 40(lost contribution on X) in total 140…

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garvit says

Thanks for your lecture sir

I am bit confused as I thought the lost contribution will be 4-3=1. So the transfer prices will be 70+ 1*10(hr)= 80 . Since I think that by producing y , they would be earning at least 3$ per hour instead of $4. So lost contribution is $1 per hour.

taofeeq11 says

Dear sir,

Thank you for your lectures! May God bless you.

I attempted example 8 before watching the lecture as advised. I arrived at $110. However, my rationale was different as follows:

Division A will only be motivated to transfer product Y to division B, if B pays at least $100 (the external price, so there is no loss of contribution to A, in view of the limited capacity and unlimited external demand). In addition, every time A produces and sells product Y at $100, there is a loss of $10 contribution ( the10 hours required to produce one Y will produce 2 Xs, will gives $40 contribution instead of $30)

Hence Minimum transfer price > marginal cost + loss contribution due to external price + loss contribution for producing Y instead of X i.e. 70+ 30+ 10.

Did I arrive at the $110 by coincidence?

cyen says

Hi John,

Can I say that we always add lost of contribution if there is a limited production capacity?

John Moffat says

Yes (assuming of course that there is lost contribution because they would otherwise be selling goods elsewhere 🙂 )

cyen says

Thank you John!

israabbas says

Hi, Ms. Jhone that was very informative I didn’t need to read it even thank you. I just wanted to ask you a very tiny thing?

if $70 was the marginal cost for Y then what is the $30 given in the example represents.

am saying this because you deduct the 70 from 110 and the result was the contribution cost.

John Moffat says

$30 is the contribution per unit from product Y (the selling price of 100 less the variable cost of 70),

israabbas says

am very shamed to ask such silly question forgive me perhaps I was hungry 🙂

John Moffat says

Don’t be ashamed (and I hope you are less hungry now) 🙂

John Moffat says

But they wouldn’t be selling Y externally. If they were not selling to the other division they would make X and sell that externally because it would give a higher contribution.

leobenny says

Sir

Minimum transfer price that should be charged should be 140 ?

I mean Y is selling the product externally for 100…

70 the mariginal cost and 30 the contribution

So if division A is selling Y to division B

They should get

70 the marginal cost + 30 lost contribution by selling externally + (10*4=40) contribution lost by not selling X … so the total should have been 70+30+40 = 140 isn’t it?

I’m little confused here

Please do help sir

ahmedakande019 says

yes, because profit has to be made on producing Y, the contribution(less and cost saving) should be added to the marginal cost with the lost contribution of 40, in total Minimum tranfer price A should charge for producing Y should be 100(variable cost plus) and 40(lost contribution on X) in total 140…

Please sir could you clarify?

Thanks

John Moffat says

The variable cost of producing Y is not $100. If you look at the question in the free course notes, then variable cost is $70.

So the transfer price for Y is 70 plus the lost contribution on X of 40, and so is $110.